Friday, September 15, 2006

Tiscali - Financial Riddles

Tiscali reported yesterday a really mixed bag of performance in its' interim results and the riddle about Tiscali’s finances has not yet been solved. The cash burn for the first six months was €44m with the major items being incoming EBITDA at €64m offset by outgoing Capex at €92m and Interest payments of €10m. The Capex figure itself was remarkable with €70.5m being intangible and related to capitalised customer acquisition costs and some new IRU contracts. The tangible assets additions were only €21.5m which is remarkable given the amount of exchanges unbundled in the period – 192 in the UK and 73 in Italy.

Tiscali say revenues growing by 17% to €412.5m with the UK accounting for 50%, Italy 26%, Netherlands 13%, Germany 9% and others 3%. The split in growth was remarkable with the UK accounting for 39%, Italy 7%, Netherlands 5% and Germany -14%. Clearly, the only place which is showing good growth is in the UK. In terms of profitability the results were also varied:• UK made €34.5m of EBITDA (up from €22.1m), but operating profit was still a negative €6.6m;• Italy made €14.5m of EBITDA (down from €15.5m), but operating profit was still a negative €8.7m• Netherlands made big gains with €23.1m of EBITDA (up from €12.2m), with operating profits of €9.7m• Germany had a nightmare at roughly EBITDA breakeven (down from €5.7m), but operating profit was a negative €10.5m and a further €30m write-down of asset due to poor trading.• Czech Republic made EBITDA losses of €03.m (compare to plus €0.4m), WITH operating profit a negative €1.9m

I think the write-down in Germany means it is due to be sold off, perhaps with the Czech Republic which is also is decline. The Netherlands position improved sharply even showing operating profits and it is noticeable that the entire Dutch customer base connects to the LLU infrastructure. It would be nice to see a higher rate of growth in the customer base than 10% (26k to 276k). I was extremely surprised to see Italy in decline, Tiscali blamed this on higher marketing expenditure, but the growth is well below equivalent Fastweb figures – I think there is a potential huge problem here. The UK is showing great growth, but my worry would be the cash position of the parent will be holding the subsid back especially with the integration of HomeChoice to complete and roll-out of Video-on-Demand services.

The forthcoming key dates in the calendar are on Sept 26th when the equity linked bonds mature. The share price is the key variable in the equity/cash ratio equation, with the ratio current €65m equity to €145m cash. After this, it seems the new Business Plan will be revealed to the Market in the week commencing October 9th. I presume this will detail any disposals, new partners & possible new equity and the business plan to support the current levels of debt. This is the key announcement which will determine whether Tiscali continues to survive as an independent European ISP.